Definitions
Aggregate
When the inflation rate is positive, what is happening to prices?
Prices are increasing
The business cycle measures this indicator over time
Real GDP
Which institution is responsible for fiscal policy?
The federal government (Congress and the President)
What is the Fed's dual mandate?
Control inflation and unemployment
The value of all final goods and services produced within a country's borders within a year
Gross domestic product
Name and give an example of a component of GDP
Consumer spending + Investment spending + Government spending + Net exports (Exports - Imports)
Example answers vary
During this phase, inflation is high and contractional policy is used to correct
Expansion
Which institution is responsible for monetary policy?
The Federal Reserve
How is fiscal policy influenced by politics?
The rise in the general price of goods and services
Inflation
Frictional, structural, cyclical, and seasonal
During this phase, unemployment is increasing and expansionary policy is used to correct
Contraction
What are the three tools of monetary policy?
Open market operations (buy/sell)
Discount rate (raise/lower)
Reserve requirement (raise/lower)
How does an increased interest rate affect GDP?
Aggregate demand for loanable funds decreases, decreasing consumer and investment spending (GDP decreases), contracting the economy
Business cycle
What is the difference between real and nominal GDP?
This refers to a contraction lasting longer than two quarters
Recession
How should the government adjust taxes and spending to respond to high inflation?
Increase taxes and decrease government spending to contract the economy
How is aggregate demand for loanable funds affected when the Fed buys US treasury bonds from banks?
Fed buys bond --> bank earns money
More money (increased aggregate supply) --> decreased interest rate --> increased aggregate demand --> increased consumer and investment spending --> increased GDP, prices, employment (expansionary)
The formula for the indicator that measures the economic goal of full employment
Unemployment rate = # unemployed / # labor force
Describe a cause of inflation (what is it called, how does aggregate demand/supply shift, how does equilibrium price change)
Demand pull: Demand increases as a result of increased income, shifting to the right, causing equilibrium price to increase
Cost push: Supply decreases as a result of increased input costs, shifting to the left, causing the equilibrium price to increase
This refers to a recession in which real GDP has dropped by over 10%, is sudden, sustained, and/or severe.
How would the Fed adjust its tools (3) in a recession?
Decrease the reserve requirement and discount rate + buy treasury bonds to expand the economy by increasing the money supply.
When the Fed enacts expansionary policy, what happens to the aggregate supply, equilibrium price, and aggregate demand?
The bank has more money to lend (aggregate supply of loanable funds increases), interest rates decrease, causing aggregate demand to increase. GDP, prices, and employment increase.